Friday, January 31, 2014

Slower Economic Growth

Bad news for stocks was good news for bonds again this week. Weaker than expected economic data hurt stocks and helped mortgage rates improve to the best levels since Thanksgiving.

At the start of the year, investors were optimistic that the momentum in economic growth seen during the second half of 2013 would continue during 2014. So far, though, the economic data has been disappointing. The Employment report set the tone early in the month. Then the shortfall in China caused global stock markets to fall. The US economic data released this week was weaker than expected as well. Durable Orders, Home Sales, Personal Income, and Jobless Claims all contained downside surprises. That said, it's difficult to determine how much the unusually severe weather experienced this winter affected the data.

The last Fed meeting, when the Fed decided to begin to scale back its bond purchases, was a major market moving event. There was little drama in this Wednesday's Fed meeting, however. As expected, the Fed announced that it will scale back its bond purchases by another $10 billion to $65 billion per month. The Fed statement was very similar to the prior statement. According to the Fed, "growth in economic activity picked up" in recent quarters. In other Fed news, Janet Yellen takes over as Fed Chair starting February 1. Investors expect that the Fed under her leadership will look and act very similar to the Bernanke Fed.

Week Ahead

The important monthly Employment report will come out on Friday. As usual, this data on the number of jobs, the Unemployment Rate, and wage inflation will be the most highly anticipated economic data of the month. Before that, ISM Manufacturing and Construction Spending will come out on Monday. ADP Employment and ISM Services will be released on Wednesday. Factory Orders, Productivity, and the Trade Balance will round out the schedule. Investors also will be keeping a close eye on indicators of economic growth around the world.